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Untangling the Requirements of Protection Works Insurance for Large and Small Building Projects in Victoria

It is nothing new that builders and consumers alike have pondered over the requirements for compulsory protection works insurance that adequately covers adjoining owners in Victoria. The uncertainty does not discriminate between small or large, or commercial versus domestic building projects.

Often times caught in the middle between what Insurers are prepared to commit to in writing, versus legal interpretations of what the law mandates, owners and builders alike have yearned for clarity on what protection works insurance really is.

Section 93(1) of the Building Act 1993 (Vic) states:

“(1) Before any protection work is commenced in respect of an adjoining property, an owner must ensure that a contract of insurance is in force, in accordance with this section, against –

(a) damage by the proposed protection work to the adjoining property; and

(b) any liabilities likely to be incurred to adjoining occupiers and members of the public during the carrying out of the building work and for a period of 12 months after that building work is completed.”

People are not often aware that there are 2 limbs to be satisfied by the insurance policy that is proposed as compliant protection works coverage. There is the property damage coverage under subsection (a) that relates to any potential damage to adjoining land or buildings from the protection work, and then there is the liability insurance arising from the building work itself referred to under subsection (b).

In the past when ruling on this issue, the Victorian Building Appeals Board has had close regard to the terms of the “policy schedule” for the relevant contract of insurance under examination.

Decisions over protection works and in fact the corresponding insurance contracts have also been ruled on by the Victorian Supreme Court, on appeal from the Building Appeals Board. Needless to say, the Building Appeals Board at first instance will be tailoring their decisions to conform to previous outcomes and analysis at the Supreme Court.

Another source of misunderstanding is the assumption that the certificate of currency for the insurance policy is itself a source of rights or obligations under the policy and that it constitutes the “policy schedule”. However, the Supreme Court has previously not accepted this and said that instead the certificate of currency is little more than a summary advisory note of the policy contents, and that regard should better be had to the actual policy wording.

Given that policy wordings tend to be somewhat generic, what is usually needed is an endorsement from the Insurer to the policy wording that specifically refers to protection works insurance under section 93 of the Building Act 1993 and to the address of the adjoining property. It is usually this endorsement document, sometimes called a “Client Coverage Summary”, that can be seen as the policy schedule.

In the Supreme Court case decision of You v Thomas [2014] VSC 255 the Court did not accept that the certificate of currency was the policy schedule, even though that had been argued on behalf of the party wanting to perform the works.

In that same case, McMillan J found that section 93(1)(a) of the Act meant that the adjoining owner must themselves be an insured party, although they did not need to actually be a named insured. It would be sufficient if the adjoining owner could claim for loss under the policy themselves as a third party beneficiary, in the event of damage to the adjoining property.

It now seems to be settled law that the ordinary meaning of the first limb, under section 93(1)(a), requires insurance upon which the owner of the damaged property can itself claim.

The Building Appeals Board is currently having close regard to the recent Supreme Court (Court of Appeal) decision of Colonial Range Pty Ltd v CES-Queen (Vic) Pty Ltd and another [2016] VSCA 328. This case concerned the redevelopment of a multi-storey commercial building in central Melbourne into a high rise residential tower, with concerns over significant vibration occurring to adjacent commercial occupiers.

In the Colonial case the Court found that subsection (a) mandates that the protection works insurance must be insurance under which the owner of the damaged property can themselves directly claim, being “first party” indemnity insurance. But this did not mean that the adjoining owners needed to be named personally in the policy schedule.

Clause 4 in the Contract Endorsement stated that the Property Works Endorsement shall apply in respect of “the owners of property adjoining 150 Queen Street”. On this basis, the Court in “Colonial” decided this was sufficient to show that the owners of property adjoining the development were persons to whom the benefit of the insurance cover extended.

As a consequence, the Court held that the adjoining owner (Colonial) was within a “class of persons” specified in the contract of insurance to whom the benefit of the insurance coverage extended. On the basis of sections 20 and 48 of the Insurance Contracts Act 1984 (Cth) this meant that even though the adjoining owner was not directly named in the policy, first party indemnity insurance cover was still available.

Section 48 of the Insurance Contracts Act says:

“(1) A third party beneficiary under a contract of general insurance has a right to recover from the insurer, in accordance with the contract, the amount of any loss suffered by the third party beneficiary even though the third party beneficiary is not a party to the contract.”

The term “third party beneficiary” is defined at section 11 of that Act as: “…a person who is not a party to the contract [of insurance] but is specified or referred to in the contract, whether by name or otherwise, as a person to whom the benefit of the insurance cover provided by the contract extends.”

Further to this, section 20 of the Act stipulates that an insurer is not relieved of liability just because the names of persons who may benefit under the policy are not specified in the policy document.

To sum up the requirement for the property damage limb based on what seems to be the consensus on the two relatively recent Supreme Court decisions, the adjoining owner must have first party indemnity coverage and be able to claim directly under the policy if their property is damaged; however they do not need to be personally named if they clearly come within a class of third party beneficiaries identified in the policy schedule.

In contrast, the second limb of what the policy must contain under section 93(1)(b) is referring to liability insurance. This focusses on “any liabilities” that are “likely to be incurred to adjoining occupiers and members of the public” during the carrying out of the “building work” and for a period of 12 months after completion.

This is a very different beast to the property damage component of the insurance under subsection (a). The liability insurance does not allow the party suffering the loss to claim themselves under the policy, instead the owner carrying out the works or their agent builder as the insured party must make the claim to compensation for the loss suffered by the adjoining owner.

In addition, the reference in the legislation is to “the building work” and not the “protection work”. This is relevant to whether the insurance under the second liability limb must cover the adjoining owner for any statutory loss including the “inconvenience, loss or damage” which can be claimed under section 98 of the Building Act 1993.

In the Colonial decision, the Court held at paragraph 65 that: “Liability under s98 does not correlate with the insurance cover required by s93(1).” The Court went on to further explain the details as to why in further paragraphs, which included in summary:

Section 98 is limited to losses suffered “in connection with the carrying out of protection work”, while the insurance under section 93(1)(b) refers to liabilities likely to be incurred during the carrying out of the “building work”;

(ii) The liability under section 98 is unlimited in time, but the insurance under section 93(1)(b) is limited in time to liabilities likely to be incurred only up to a period of 12 months after the building work is completed.

It was also inferred that the liability arising under section 93(1)(b) must be linked to the property damage to the adjoining property contemplated by section 93(1)(a), whereas the compensation that an adjoining owner can try to claim under section 98 arises from “inconvenience, loss or damage” which, according to the Supreme Court “is not necessarily the same.”

Therefore the current state of the legal interpretation regarding the second liability limb of the required insurance seemingly favours a narrow interpretation. This will be the preferred situation for the insurers and will be some comfort for those seeking to obtain protection works insurance.

For further advice on your rights and responsibilities in relation to protection works, insurance and building regulation, do not hesitate to seek timely assistance from lawyers with expertise in all facets of building and construction law.

Lovegrove & Cotton Lawyers to the building industry

For thirty years, Lovegrove & Cotton have represented builders, building surveyors and building practitioners in Melbourne, Canberra, Sydney and Queensland. Doyles Guide ranks Kim Lovegrove as one of the leading construction lawyers in Australia. Justin Cotton, likewise, is a leading Australian construction lawyer and widely respected in the building fraternity as evidenced by his recent elevation to Chairperson of the HIA Industrial Relations and Legal Services Committee, and member of the Regional Executive Committee, for HIA Victorian Chapter. Lovegrove & Cotton can help practitioners resolve any type of building dispute and are preeminent in the area of building practitioner advocacy. If you wish to engage the firm, feel free to contact us via our website or by emailing enquiries@lclawyers.com.au.

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